SampleExam1 - Sample First Exam The exam will be in class...

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Sample First Exam The exam will be in class and closed book, closed notes. You may use a pen and pencil and a calculator. The exam will last for the entire class period from 10:00AM to 11:15PM. Question 1 Smoky Car Inc. is a conglomerate specializing in the manufacture of Rapid Transit Passenger Trains and Cigars. Smoky Car was founded as the shipbuilding company---Navel Nauticals---around the turn of the century. In 1963, based on advice from a famous East-Coast consulting firm, the Naval Nauticals sold all of its shipbuilding capacity, and bought Rail Car Inc, a passenger train manufacturer. To reduce the cyclicality and instability of its infrastructure-related cash flows, the firm, using the cash from the divested ship building business, also purchased La Gloria Toledo, a cigar manufacturer based in Toledo Ohio. Subsequently, the firm was renamed Smoky Car to reflect its new corporate mission. For the last few years, anti-tobacco activists have been protesting the granting of rapid-transit contracts to Smokey Car. Senior management estimates that these protests have reduced Smokey's sales revenue from it Train segment by about 30%. Thus, Smokey Car is considering spinning off its Cigar business. Management has commissioned a study that has produced the follow- ing data. Segment Trains Cars Sales H inM L 1000 5000 IndValue ê Sales 1.0 0.05 FinancialData Equity H MV L Debt H BookValue L Consolidated 800 500 (a) Using the Berger-Ofek method, determine the conglomerate discount (or premium) on Smokey Car. (b) Assuming all the data and estimates provided in the problem are correct, do you believe that a spin off will actually create or destroy value? In other words, does the Berger-Ofeck estimate reflect the real gain or loss from breaking up Smoky Cars? Please explain your logic in detail.
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